1. After I leave my employer should I leave my money in the 401(k) or roll it over into an IRA?

2. How much should I save in my 401(k)?

To help you answer these questions, I want to reference a recent Study by Demos, a non-partisan research group which found that 401(k) fees could reduce the value of your 401(k) by over 30%.

OVER 30%!

What does this mean? To quote a recent Los Angeles Times Article:

“The average American couple could pay nearly $155,000 in fees for their 401(k) plans over their careers, reducing their eventual nest eggs by more than 30%, according to a new report.

Rather than the hypothetical $510,000 that a dual-earner couple could have at retirement with no fees, they would be left with only $355,000. The fees include explicit charges and indirect expenses, such as the cost that mutual funds incur to trade stocks.”

This doesn’t include the opportunity costs which are the lost investment returns on that $155,000.

So should you leave your money in your employer’s 401(k) plan?

If your employer pays the fees or has a low fee plan with good investment options then it may make sense to leave it in the plan. But if your employer is like most companies where management does not understand the fees that 401(k) providers charge,then it may be a better idea to roll it over into an IRA.

The answer to the second question has two parts. First, free money is the best kind of money. So if your company provides a match, I normally recommend you contribute up to the match. After that point, it may not be in your best interest to put anymore money into your 401(k) plan.

While deferring taxes may sound good, it comes at a price. The fees discussed earlier in this blog should be a major concern. Tax deferral is not worth losing 30% of your nestegg.

Next you have government control of your money. A 401(k) is one of the most restrictive types of investment accounts an individual can own. You have penalties if you take the money out before 591/2 and penalties if you take too little out after 701/2. Yes you have deferred your taxes but there is no guarantee that taxes will be lower when you retire.

Finally, remember that when you pass your 401(k) onto your heirs they will owe two types of taxes: income tax and estate tax.

Complicated problems require expert advice. We are specialists in dealing with these types of issues. A bad decision could cost you 30% or more of your retirement savings. Let us review your retirement plan to identify all the issues so that you can make a smart decision about how to save for retirement.

Give me a call at 866-296-8156 or send me an e-mail at mark@markfried.com

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